VIX Graph. August 7, 2009

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The market marches higher and VIX is gradually moving lower.

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5 Responses to VIX Graph. August 7, 2009

  1. Dave 08/09/2009 at 6:49 PM #

    Mark,
    I use calls on SRS Ultrashort as a hedge for my trades I long. I fully expect these calls to expire worthless, they are bought solely as a sleeping aid.
    Sooner (probably) or later I assume the SRS will “reset” with a 20:1 reverse spit– seems it’s just what they do. I know you get asked the split/ cooperate question often (so sorry– here goes again) but if my calls entitle me to buy shares at, say 95.00 below the adjusted price, how can that be– can’t get my mind around that..?
    TIA! Dave

  2. Mark Wolfinger 08/09/2009 at 9:28 PM #

    Dave,
    Headline: SRS calls replace Sominex. GlaxoSmithKline shares tumble.
    “if my calls entitle me to buy shares at, say 95.00 below the adjusted price, how can that be…”
    Your calls will not entitle you to that.
    Right now your calls give you the right to buy 100 shares by paying the strike price per share.
    If there is a 1 for 20 reverse stock split, then those calls will get a new symbol. In addition, they will give you exactly what you have now. There will be no ‘real’ change. Because 100 current shares become 5 ‘new’ shares, your calls will allow you to buy 5 shares by paying exactly the same amount as you have the right to pay now.
    Thus if you own Jan 15 calls, you can buy 100 shares at $15 per, or $1,500 total. After a 1 for 20 split, you will own the right to pay the same $1,500 and buy 5 of the new shares – or $300 per share.
    Does that make sense to you?

  3. Dave 08/09/2009 at 9:47 PM #

    Yes, excellent– thank you!
    Another idea that dawned on me (all this sleep I’ve been getting) is that I should be buying IYR puts instead of SRS calls for downside protection: The 2x ETF’s value diminishes and eventually they all end up at zero… So why am I trying to swim up stream? Plus, in the event my downside insurance is needed I’ve got IV on my side, right?

  4. Mark Wolfinger 08/09/2009 at 11:10 PM #

    You are welcome.
    OK. This is beginning to get confusing. Be very careful what you trade.
    1) We agree that buying calls of leveraged ETFs is disadvantageous. But it does provide what you need if there is a large rally.
    2) Buying puts is acceptable for leveraged ETFs, if protecting the downside is your goal. There is no worry about a drift in the price of the ETF towards zero.
    3) But to buy puts in the inverse leveraged ETF is not quite as good as buying calls in the ‘regular’ leveraged ETF. [I don’t know which adjectives to use to describe which ETFs. I hope I am not confusing you.]
    That’s because the ETF can only move to zero, and that limits your gains and thus, upside protection. You must decide if owning these puts provides enough protection.
    4) For the upside, I suggest buying twice as many calls in the ‘regular’ ETF – i.e., non-leveraged. Except for higher commission costs, you know that provides what you need, with no limits.

  5. Dave 08/10/2009 at 7:16 PM #

    OK Mark that pretty well sums up what I was thinking, thanks. The double purchase on a regular ETF makes A LOT of sense– never though of that!